Sims Metal Management (SGM) collects, sorts and processes scrap metal materials that are recycled for resale.

The company’s divisions include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of semi-fabricated steel products.

SGM has operations in Australia, New Zealand, the United Kingdom, North America, Asia and Europe and is the world’s largest listed metal recycler with approximately 270 facilities and 6,600 employees globally.

The company is currently in a global search for a new CEO after current CEO Daniel Dienst announced he would retire when his contract concludes on June 30 2013.

1H13 Results

The group’s 1H13 results were disappointing to say the least. Revenue came in at $3.4 billion, a 25% decline on the prior corresponding half, due to a reduction of intake shipments in North America.

SGM reported a 1H13 net loss of $295.5 million, 53.3% better than the prior corresponding period’s $633.2 million loss. The result was attributed to goodwill impairments and inventory writedowns totalling $291.3 million.

On an underlying basis, the group did record a $10 million profit, although the rest was down from $42 million a year earlier. Given the poor result, management decided not to declare a dividend for the first half – the first time the company has not paid an interim dividend since listing.

US and UK Businesses

On 21 January 2013, SGM announced that it will form a special committee to investigate the inventory valuation issues in the company’s UK business.

The result of the committee’s investigation was a $78 million write-down of inventory, of which $16 million was allocated to 1H13 and the remaining balance resulted to a restatement of prior period results.

The write-down represents a massive 29% of the value of inventories in its UK business. That trouble does not stop in the UK.

SGM’s US division, which contributes around 60% f the group’s overall sales, also suffered impairment charges in the first half. The company recorded a goodwill impairment charge of $291 million in the 1H13.

Excluding the write-downs, the US business barely made a profit, reporting an underling EBIT of $2.1 million–a 30% drop from the prior corresponding period.

Looking ahead

The outlook does not look pretty for SGM, at least in the short-term. The $78 million writedown on its UK inventory is extremely alarming because it shows the company’s lack of adequate financial controls in relation to its inventory reporting.

It also brings into question the company’s financial controls in other regions and raises the possibility of further write-downs. Poor management has led to the decision not to distribute a dividend for the first time since it listed, which does not bode well for shareholder confidence.

Moreover, the group downgraded its guidance three times in 2012. Without a significant pickup in US economic activity, we cannot see this year being any different. As such, we feel there is more downside to SGM’s share price in the near-term.

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Sims Metal Management (ASX:SGM) recycles ferrous and nonferrous metals and other materials ranging from other metals to plastics, electronics tyres and refrigerators.

The company has operations in Australia, New Zealand, North America and Europe.

SGM fell heavily over the GFC as commodities crashed, and has since failed to make a significant recovery as the scrap metals market has failed to see a solid price recovery.

A continued deterioration in scrap metal demand bodes poorly for SGM, which has recently reported a string of very disappointing financial results.

Its recent FY11 earnings were fairly robust but SGM’s outlook remains uncertain due to global market volatility.

FY11 results impress

Sims Metal Management had a tough start to FY11 after reporting a 75% on-year plunge in 1Q11 net profit to $8.2 million.

EBIT for the period also slumped 69% to $16.7 million, with SGM attributing the poor result to lower scrap intake, and constrained scrap flows and margins.

Last month, SGM reported a FY11 net profit jump of 52% to $192.1 million, with underlying profit of $182 million topping analyst estimates.

A final dividend of 35 cents was declared. Revenue was up 19% on-year amid stronger scrap shipments and improved pricing.  Intake was higher across all regions, which helped drive profit growth.

An improvement in its US operations was a big contributor to the results. However, no guidance was given due to the global economic uncertainty.

Global pain

Nearly 85% of SGM’s earnings are from North America and Europe. These areas are currently experiencing significant problems with a looming euro debt crisis.

Global difficulties in the form of US political gridlock, that country’s first ever credit downgrade, continued European sovereign debt fears, and Chinese inflationary pressures have prevented SGM from providing guidance.

We have also seen the Aussie dollar rally significantly over the past year, adding to the challenges SGM is already faced with.

A higher Aussie dollar results in SGM reporting lower earnings from its overseas operations.

During the last wave of global uncertainty, SGM went through a string of disappointing financial releases.

Looking ahead

SGM has not provided any specific outlook, due to a lack of clarity regarding future economic conditions that could affect scrap flows.

As such it has been one of the shares to sell in recent months.

With a history of disappointment during tough global periods, we feel SGM is not out of the woods yet.

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